For one Level Global founder, the party is over

For the two founders of FBI-raided and since-shuttered hedge fund firm Level Global, life could not be more different.

In early January, one co-founder, David Ganek, sat court-side at Madison Square Garden as the Charlotte Bobcats pummeled the New York Knicks. Ganek appeared relaxed and jovial as he greeted familiar faces in the front row. The Knicks lost, but Ganek could still enjoy the Knicks home-base party.

For Level Global’s other founder, Anthony Chiasson, life is not as sweet.

Chiasson and six others (including another former Level Global-ist, analyst Spyridon Adondakis) are accused of running a $62 million insider trading scheme in 2008 and 2009. He was released on $5 million bail on Wednesday, and has denied the charges against him.

Of all the defendants who are accused of lining their pockets with ill-gotten gains, the figure attached to Chiasson and Level Global is the largest: $57 million.

Authorities said Chiasson and Newman made millions improperly by trading ahead of tech company Dell’s earnings announcements in 1Q and 2Q, 2008.

In the FBI complaint, special agent David Makol outlined how inside information allegedly passed from a Dell employee to hedge fund analysts including Adondakis, who at the time reported to Chiasson at Level Global:

On or about August 5, 2008, at approximately 8:41 a.m. … Adondakis provided the information about Dell’s gross margins to CHIASSON and one or more other individuals at Hedge Fund B [Level Global]. CHIASSON and another individual at Hedge Fund B instructed Adondakis to analyze the effect on Dell’s stock price based on the Dell Inside Information Adondakis had received.

Thereafter, Adondakis prepared the analysis and on or about August 8, 2008, met with CHIASSON and Individual 2 in CHIASSON’s office to discuss it.

Based on my review of trading records for Hedge Fund B, on or about August 11, 2008, at approximately 10:29 a.m., Hedge Fund B sold short an additional 100,000 shares of Dell stock, and purchased 5000 put option contracts in Dell, with expiration dates of September 25, 2008, a date that was after Dell’s expected public earnings announcement.

This phase of the FBI’s investigation stems from an original probe that brought down mega hedge fund the Galleon Group, and its billionaire founder Raj Rajaratnam, who is currently serving an 11 year prison sentence for insider trading. One of the misdeeds highlighted by district attorneys in Rajaratnam’s case, was an effort to conceal the use of inside information by initiating email chains that indicated legitimate research on relevant equities.

In the Rajaratnam case, the FBI possessed wiretaps in which the Galleon chief discussed the contrived email chains.

In the complaint against Chiasson, the FBI alleged he similarly instructed an analyst to compile research on Dell that would show why the firm traded the stock the way it did, after inside information on the company had already been used to make bets.

According to the FBI complaint:

Subsequently, CHIASSON additionally instructed Adondakis to write up an investment thesis for Dell which supported the theory that gross margins would be “light,” but which omitted the fact that the information came from a contact at Dell. Adondakis prepared this analysis and sent it by email on or about August 15, 2008 at approximately 1:43 p.m. to an email group at Hedge Fund B that included CHIASSON.

Wednesday’s arrests are just the latest installment in a long-running saga. With Chiasson having denied the charges against him, and federal authorities determined to make examples of accused insider traders, this drama is far from over. Even if, at least for now, the party is over for Chiasson.